US Dollar on Verge of Long-term Breakdown

March 5th, 2011
in contributors

 Erik McCurdy    By Erik McCurdy

GEI welcomes Erik, senior market technician for Prometheus Market Insight, as a regular contributor.  He will present a technical analysis highlight each week in the Investing Blog and make other occasional contributions to Investing and other GEI Blogs.  Full bio at end of article.

The monthly chart of the U.S. Dollar Index shows a key development in its technical behavior.

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 Click here for large image of the graph.

McCurdy 3-5-2011 dollar

The US dollar index has been forming a symmetrical triangle since late 2005. This technical pattern signifies indecision, but a formation breakout or breakdown usually results in a powerful move in the direction indicated, as the coiling action builds tension until the next trend begins. Buyers move the price up to resistance and sellers move the price back down to support, and then that cycle repeats itself. However, every time one side of the market takes price action in its direction of choice, the move is smaller. In a sense, both sides are digging in psychologically. A battle line is effectively drawn, and although neither side is sure which way the trend will head next, the participants aren't willing to give up on their respective beliefs with regard to future direction. The tension continues to build as the pennant winds down into a smaller and smaller range, before prices finally move out of the formation decisively, causing the "winning" side of the market to gain confidence and the "losing" side to become disheartened. Thus, the move tends to gain significant momentum in the direction of the break and a powerful new trend is born.

Returning to the symmetrical triangle on the US dollar index monthly chart, the last rebound in late 2010 failed to advance into the upper half of the formation before quickly returning to the lower boundary of the triangle. This week, price action moved well below formation support, threatening to break below this important technical level. As always, it is the close that matters, so it will be important to monitor the US dollar until the end of March. A monthly close well below the lower triangle boundary near 77 would constitute a formation breakdown and forecast a relatively quick move down to previous long-term lows in the 72 area. Additionally, a return to the 2008 secular bear market low would substantially increase the likelihood of a subsequent move down to new long-term lows, a potential development that would have major implications for the financial markets.

Erik McCurdy is the senior market technician for Prometheus Market Insight and has been analyzing charts every day for over 15 years. The software program that he developed to monitor long-term stock market trends has correctly predicted over 90% of the long-term turning points in the S&P 500 index since 1940. His Gold Currency Index has predicted every major trend change in the US gold market since its creation in 2005. The Prometheus Market Insight newsletter service provides daily, weekly and monthly forecasts for stocks, bonds, currencies, commodities and precious metals using proven computer models that base their predictions on technical and cycle analysis.

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